The Secret Sauce To Wealth Creation

Generally speaking, a secret sauce is the essential (but perhaps largely unknown) ingredient required for success. In my first book, The Ten Truths of Wealth Creation, I identify that, for both societies and individuals, ownership and control make up the secret sauce for wealth creation.

Few books have made an impact on my thinking as much as The Mystery of Capital by Hernando Desoto and The Gospel of Wealth by Andrew Carnegie. Although these books were written many years ago, they capture perhaps the most overlooked and misunderstood ingredients that today’s manufactured financial products lack.

Ownership that is based on well-defined and legally secure property rights is the foundation of prosperity. This concept is what built America into a land of opportunity. While this statement may seem overly simplistic, it is nonetheless accurate: the more I travel the world and witness examples of wealth and poverty, the more these principles have shown to hold true.

In addition to seeing these principles in play in examples of wealth and poverty around the world, I have found them to be closely followed by America’s wealthiest individuals. And if applied to your personal financial decisions, they can well be the foundation—the secret sauce—for your own personal financial wealth.

Granted, the typical individual doesn’t have the wealth of an Andrew Carnegie, Warren Buffett or Bill Gates, but unlike Donald Trump they all started from nothing. Andrew Carnegie was a poor immigrant from Scotland, and Bill Gates started Microsoft in a garage and couldn’t even afford the rent. Warren Buffett may be the sage of Omaha but, unlike most of us, when he buys stock in a company he buys at least the controlling interest. Each of these individuals understood the secret sauce.

For the typical individual, there are four ways to be an owner.

Stocks

Ownership with risk: you trade cash for stock, and you get all the risk.

Real Estate

You own the property and all the potential appreciation (or depreciation); if you use someone else’s money—like our president—you can often enhance your return and reduce your risk.

A Good Idea

Just ask Bill Gates how well that worked out; the more civilized a society, the better the intellectual property rights protections.

Mutual Insurance societies

The oldest form of ownership and the only option available in developing societies, mutual insurance offers a safe way to protect your wealth. You have ownership of the company and you transfer the risk; while this may not create wealth, it is in my experience the best way to protect it.

I travel annually, immersing myself in a developing country. From India to Cambodia, Vietnam to Africa, I have visited rural towns and major cities and have witnessed how the simple principle of ownership and control affects each society and its citizens. I recently returned from a three-week trip through Thailand, Cambodia and Vietnam—countries governed by Communism or military junta. Things that we take for granted in the U.S.—the ability to own land, to be rewarded for our hard work, to get a loan for a car, to start and own a business—are only available to a chosen few. Citizens in Cambodia and Vietnam have only recently been allowed to acquire land rights. It’s not the same as title, but it allows them the right to use the land. In Cambodia, foreigners can own a condo but they are not allowed to own the first floor.

Years ago, I had the privilege to meet Nelson Mandela. I asked him how he planned to lift his people in the Soweto villages out of poverty. For political reasons, he could not give them ownership of the land; instead he gave them 100-year land leases. He asked me—as he had asked his opponents—a simple question: Have you ever washed a rental car? You don’t take care of what you don’t own, he said. Last year, I visited those same villages and saw new apartment complexes built by the government. Next to these were shantytowns made from scraps of sheet metal. The apartments were still vacant five years after being built—the Soweto residents were unwilling to give up the little bit that they owned, despite the luxury available to rent.

A society that has no ownership rights has no financial system. You can’t borrow, and you can’t share in appreciation—the only thing you own is your name and reputation. And when I think about that, it explains a lot about what is happening in the world.

The more I learn about the world through travel and study, the more I believe that, for a society to prosper, they must provide the economic structure to provide for secure property ownership to enable individuals to truly participate.

You may not be a country, but if you apply the principles of ownership and control when you evaluate investment decisions, you will be taking the most important step to building wealth.

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John E. Girouard is author of Take Back Your Money and The Ten Truths of Wealth Creation, a registered principal of Cambridge Investment Research and an Investment Advisor Representative of Capital Investment Advisors.

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